Prepaid Tuition Plans
Advantages and Disadvantages

Section 529 plans (prepaid tuition programs and college savings plans) present many advantages as a college savings vehicle. There are however, also disadvantages to these plans. Each state has somewhat different rules, so be sure to check out carefully the particular plan you intend to use.

Advantages

• Taxes are deferred until money is used for college or withdrawn
• Earnings are income of the student, probably a lower tax rate than the donor's
• If money remains after the beneficiary graduates, it can be used for graduate school or transferred to another family member
• There is no Adjusted Gross Income limitation for donors
• Students may attend any accredited school in the U.S. (benefits may be limited under the prepaid tuition variety)
• Donor retains control until the student enters college (they can cancel or change the beneficiary)
• Can be used for most college expenses including tuition, fees, books, supplies, and room and board.
• Contributions are flexible. Can be monthly payments or lump sum.

Disadvantages

• No investment control; funds are managed by the trust
• Trust will choose conservative investments, not necessarily the same as the donor would choose
• Penalties apply if funds are not used for college
• Cannot contribute to both an education IRA and tuition plan in the same year
• Financial aid is impacted by the amount in the fund
• Contributions subject to annual and lifetime gifting limitations while direct payment of tuition is unlimited

See also:
        College Savings - Section 529 Plans Overview
        Taxes and College Financial Aid

Source:  Education Incentives. (2001). p. 29. Roseville, CA: Professional Education Services, LP.

© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010418.